COMMISSION STAFF WORKING DOCUMENT Country Report Cyprus 2015 {COM(2015) 85 final} This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position.
Date: 2015-02-26
Institutions: European Commission
Subjects: Cyprus, bank, economic disparity, economic stabilisation, fight against unemployment, macroeconomics, poverty, public debt, structural adjustment, tax collection, youth unemployment













EUR-Lex - 52015SC0032 - EN











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52015SC0032

COMMISSION STAFF WORKING DOCUMENT Country Report Cyprus 2015  {COM(2015) 85 final}     This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position.









                                                                                                                                                   
Executive summary  1
1.       Scene
setter: economic situation and outlook  3
2.       Structural
issues 8
2.1.   Fiscal policy
and taxation  9
2.2.   Financial
sector 11
2.3.   Labour
market, education and social policies 13
2.4.   Structural
measures promoting sustainable growth and competitiveness 15
2.5.   Modernising
public administration  17
AA.   Europe 2020
Targets: Overview   18
AB.   Standard
tables 25
LIST OF Tables
1.1.     Key
economic, financial and social indicators 6
1.2.     The MIP
scoreboard   7
AB.1.  Macroeconomic
indicators 25
AB.2.  Financial
market indicators 26
AB.3.  Taxation
indicators 27
AB.4.  Labour market
and social indicators 28
AB.5.  Expenditure on
social protection benefits 29
AB.6.  Product market
performance and policy indicators 30
AB.7.  Green growth  31
LIST OF Graphs
1.1.     Real GDP
growth and contributions 3
1.2.     Harmonised
Index of Consumer Prices 3
1.3.     Employment
and Unemployment 3
          LIST OF bOXes
1.        Programme surveillance  4
LIST OF Boxes
No table of contents
entries found.
LIST OF Maps
Although the external environment is
unfavourable, Cyprus' macroeconomic outlook shows signs of stabilisation. The recession is gradually losing momentum, and real GDP has
contracted by 2.4%, i.e. significantly milder than the 5.4% contraction in
2013. While the resilience in private consumption continued in 2014,
investment, particularly in construction, continued its downward adjustment.
Despite the fall in activity, the unemployment rate has stabilised and has
registered 16.1% of the labour force during the first part of 2014. In 2015 and
2016, growth is forecast to resume only gradually as private domestic demand
slowly picks up, supported by lower energy prices. External demand is expected
to be negatively affected by the deterioration of the economic situation in
Russia. Negative risks remain however, notably due to a potentially more
extended period of tight credit supply and a worse-than-expected deterioration
of the economic situation in Russia.
Fiscal consolidation remains necessary. Building on the strong fiscal performance to date, the authorities
would need to maintain prudent budget execution. As agreed at the start of the
programme, an additional adjustment will be necessary towards the end of the
programme to attain the long-term objective of a sustained 4% of GDP primary
surplus, which is needed to place public debt on a sustainable downward path.
The 2014 primary balance could be significantly better than the end-year
primary target (of -1.2% of GDP). However, the statistical accounting of the
cooperative banking sector recapitalisation in early 2014 could have a one-off
negative impact amounting to several percentage points of GDP.
Although there has been progress on
various fronts, compliance with programme conditionality in some fiscal
structural and structural reforms is lagging behind schedule. Progress has been made, notably with the adoption of the welfare
reform, the adoption of the medium-term debt management strategy and risk
assessment of government guarantees, and on international tax cooperation,
which could reverse the negative rating by the Global Forum. Measures to
facilitate employment and to mitigate the negative social effects of
unemployment have been partially implemented, albeit at a slow pace. However, some
delays have accumulated since September 2014, particularly on healthcare
reform, privatisation, revenue administration, and public administration
reform.
The banking sector has gradually
stabilised. The outcome of the Comprehensive
Assessment by the European Central Bank was positive with only one bank
requiring additional capital that could be met with private capital. As a
result, deposit outflows continue, but they have stabilised. Capital controls
on domestic transactions have been abolished and the controls on external
transactions are now being gradually phased out. 
The most pressing challenge going
forward is to reduce the excessively high level of non-performing loans in the
banking sector, which will be key in restoring bank intermediation functions
and thereby supporting investment growth.
Non-performing loans are still on the rise, reaching 48.5% of outstanding loans
in September and 49.7% in November 2014. Bank  restructuring of these loans
remains very slow. Two key measures in this regard are the proper
implementation of the foreclosure law (which allows a bank to seize real estate
collateral) and a modern insolvency framework for individuals and companies.
These two legal frameworks are needed to create incentives for both debtors and
creditors to agree on debt restructuring. The foreclosure law has been adopted,
albeit with delay, thereby postponing the conclusion of the fifth review, as it
was one of the prior actions for concluding the review. However, the House of
Representatives has further postponed the implementation of the Law. Concerning
the insolvency framework, most draft laws have been sent to Parliament, but
work on the new personal insolvency framework process is not as advanced.
There is an urgent need to step up the
momentum of structural reforms, notably in the
areas of public administration, privatisation, healthcare, liberalisation of
regulated professions, and energy, if substantial progress is to be achieved by
the end of the programme in March 2016. This would also help a revival of
productive investment, one of the key priorities of the new Commission.
The recession moderated in 2014, with
real GDP down by -2.4%, which is significantly less than the -5.4% contraction
in 2013. While the resilience in private
consumption continued in 2014, exports weakened, particularly to Russia.
Imports, however, increased, following their weak level in 2013 while also
reflecting one-off purchases, and leading to a deterioration of the current
account balance. 
Gross fixed capital formation declined
further in 2014, although at a slower pace than in
2013. Investment in construction was particularly weak, dragging down
investment to 12% of GDP. Equipment and other investments also fell, partly
reflecting the low use of production capacity and lack of credit. 
 Graph 1.1:     Real GDP growth and contributions 
 Source: European Commission 
Low domestic cost pressure and declining
energy prices weighed on the Harmonised Index of Consumer Prices inflation,
which turned negative in 2014 (-0.3%). Harmonised
Index of Consumer Prices inflation has been supported by prices on goods
consumed by tourists, while prices of goods consumed mostly by residents have
continued to fall.
 Graph 1.2:     Harmonised Index of Consumer Prices 
 Source: European Commission 
Signs of a stabilising labour market
emerged in the course of 2014, with the
unemployment rate registering 16.1%. Employment continued to contract, albeit
at a slower pace. Youth unemployment reached 40% towards the end of 2013, but
has since then declined, while long term unemployment continued its upward
trend.
 Graph 1.3:     Employment and Unemployment 
 Source: European Commission 
The housing market continued its
adjustment in the course of 2014, bringing the cumulative fall in prices since
mid-2008 to around 30%. The fundamentals for
housing demand remain weak. Labour income is still falling, credit for house
purchases remains limited, and lending rates remain high. 
In 2015 and 2016, growth is forecast to
resume only gradually as private consumption slowly
picks up, supported by lower energy prices. This should be accompanied by
gradual deleveraging of both households and corporates and a reduction of the
non-performing loan ratio down to more sustainable levels. Investment is
forecast to start recovering modestly in 2015 and 2016, supported by ongoing
work on rebuilding a sound banking system. The economic recession in Russia is
forecast to weigh on export growth and to more than offset the positive impact
on demand from lower energy prices. Import growth is forecast to gradually pick
up and, as a result, the current account deficit is foreseen to hover around
4-5% of GDP in 2015 and 2016. ([1]) The moderate pick-up in domestic demand is expected to be
reflected into improved labour market conditions, with unemployment starting to
ease gradually. Harmonised Index of Consumer Price inflation is also expected
to remain low, weighed down by recent declines in oil prices.
Risks to the recovery are tilted to the
downside. On the domestic front, a failure to
reduce the high non-performing loan ratio could lead to a more prolonged period
of tight credit supply conditions, stalling the economic recovery. On the
external side, a further deterioration of the economic situation in Russia
would weight on GDP growth via its impact on tourism and professional services.

Fiscal consolidation continued over the
course of 2014. Preliminary data for 2014 suggests
that the general government primary balance has performed better than expected
in the context of the Commission's Winter Forecast 2015 (presented in the table
below) and shall exceed the programme targets set in July 2014. However,
depending on the Eurostat decision on the statistical treatment of the
cooperative banking sector recapitalisation, which is likely increase the
headline deficit by some percentage points of GDP, the headline deficit may
still exceed the EDP benchmark of 3% of GDP. 
The fiscal performance for 2014 was
equally driven by revenue and expenditure developments. Revenue increased compared to 2013, driven by consolidation
measures, high dividends from the Central Bank of Cyprus, and more resilient
private consumption than initially anticipated. Total expenditure remained on a
clear declining path, despite the adverse impact of called government
guarantees. This largely reflects tight expenditure control, as a measure under
Cyprus’ economic adjustment programme, aiming at reducing the public sector
wage bill and moderating early retirements in the public sector, as the cost of
lump-sum pension payments has been reduced. 
Further gradual fiscal adjustment is
expected in 2015 and 2016, reflecting the impact of
enacted consolidation measures and gradually improving economic conditions. The
debt-to-GDP ratio is expected to peak in 2016 and to gradually reduce to below
100% by 2020.
Box 1. Programme surveillance
As for all Member States benefiting from a
financial assistance programme, progress in implementing the accompanying
policy programme in Cyprus is monitored in a regular and specific manner, in
line with the provisions of the Memorandum of Understanding. This Country
Report, which is part of the 2015 European Semester procedure, provides a
synthesis of recent progress in implementing the programme. More details can be
found in the reports on the state of implementation, which the European
Commission publishes following each programme review mission.([2]) Given the extensive reporting
requirements under financial assistance programmes, as well as their strict
monitoring and enforcement, programme countries are exempt from the obligation
to submit national reform programmes and stability or convergence programmes
(Regulation (EU) No 472/2013, Article 10(1)). However, countries with a
financial assistance programme have been asked to present the standard fiscal
tables and report on the Europe 2020 targets.
Following the request made by Cyprus on 25
June 2012, the European Commission, the European Central Bank, and the
International Monetary Fund negotiated an Economic Adjustment Programme with
the Cypriot authorities. It was approved by the European Stability Mechanism on
24 April 2013 and by the International Monetary Fund board on 15 May 2013. The
programme covers the period of 2013-2016. Its financial package covers up to
EUR 9 billion provided by the European Stability Mechanism and EUR 1 billion by
the International Monetary Fund. So far, a total of EUR 6.1 billion has been
disbursed (EUR 5.7 billion from the European Stability Mechanism and EUR 428
million from the International Monetary Fund).
The main objectives of the programme build
on three fundamental pillars: (i) policies to restore the soundness of the
financial sector and rebuild depositors' and market confidence by thoroughly
restructuring and downsizing financial institutions and strengthening
supervision; (ii) continued fiscal consolidation in order to correct the
excessive general government deficit by 2016 and put the gross public
debt-to-GDP ratio on a clear downward path in the medium-term; and (iii)
structural reforms to support competitiveness, to enable the economy to return
to sustainable growth, and to unwind the macroeconomic imbalances.
 Table 1.1:       Key economic, financial and social indicators 
 (1)Domestic banking groups and stand-alone banks. (2) Domestic banking groups and stand-alone banks, foreign-controlled (EU and non-EU) subsidiaries and branches. (3) Real effective exchange rate (*) Indicates BPM5 and/or ESA95 Source: European Commission 2015 winter forecast; Commission calculations. 
 Table 1.2:       The MIP scoreboard 
 Flags: e: estimated. p: provisional.                                                                                                                                                                                              Figures highlighted are the ones falling outside the threshold established by EC Alert Mechanism Report. For REER and ULC, the first threshold concerns Euro Area Member States. (1) Figures in italic are according to the old standards (ESA95/BPM5). (2) Export market shares data: the total world export is based on the 5th edition of the Balance of Payments Manual (BPM5). (3) Unemployment rate: i=Eurostat backcalculation to include Population Census 2011 results (4) International investment position data have been revised downwards following the incorporation of ship-owning Special Purpose Entities (5) House Price indicator: e = Eurostat estimates. Source: European Commission 
The fiscal performance in 2014, which
was above the targets set in the programme, is due to developments on the
revenue and expenditure side. Generally, on the
revenue side, the better-than-projected macroeconomic outcome has mainly
resulted in higher receipts of indirect taxes and government fees. On the
expenditure side, the main drivers were lower-than-expected lump-sum retirement
payments and intermediate consumption (reflecting tight budget control), as
well as lower-than-expected calls of government guarantees.
Progress has been made in public finance
management. The Fiscal Council has started working
and has recently published its autumn 2014 report. However, the institution is
not strong enough. That is why the Memorandum of Understanding foresees
measures aimed to strengthen it in terms of working processes, technical
expertise and resources to ensure its full operability. In addition, Cyprus has
for the first time undertaken a systematic risk assessment of government
guarantees to be called in 2014 and beyond. The government also adopted a
comprehensive medium-term debt management strategy in late December 2014. It is
expected to issue the appropriate guidelines for public investment projects in
line with the Fiscal Responsibility and Budget System Law provisions. 
The new Cyprus Tax Department (merging
the Inland Revenue Department and the VAT Services) has been created, but there
has been no significant progress in the reform of the revenue administration. The appointments of a Tax Commissioner and of an Assistant Tax
Commissioner have not resulted in the anticipated acceleration of reforms. The
new integrated Large Taxpayer Office formally opened its doors in early January
2015, but is not yet fully operational, which could create a substantial risk
for tax collection. In general, despite extensive technical assistance received
and significant reform steps achieved, the pace of the reform is lagging
behind, mostly due to insufficient business process ownership and unclear
responsibilities. In particular, the enhanced collection powers (garnishing
bank accounts and seizing movable assets) have not been tested in practice; no
strategy to fight tax fraud including by criminal prosecution has been drafted;
and new approaches on improving taxpayer compliance have not yet been applied
in practice. Finally, management appointments are lagging behind schedule. The
end-January technical programme mission has however produced some encouraging
progress and overall the reform is going forward, albeit slower than expected. 
The main policy decisions on the design
of immovable property taxation, which are expected to be implemented in 2015,
and which aim at improving the fairness of the tax burden and at increasing the
efficiency of the tax administration, have not yet been communicated. It remains unknown how the Cypriot authorities intend to design the
immovable property taxation system, consolidate its administration and its
related transaction fees.
Overall, bank restructuring has been
successful. The Bank of Cyprus has broadly
finalised the operational implementation of its restructuring plan, as all
planned branches and international business units have been closed and the
migration of all Information Technology operations has been completed. The
cooperative sector has also achieved a number of milestones, namely in terms of
recruitment and cost cutting. 
However, serious challenges remain in
terms of reducing non-performing loans. The level
of non-performing loans continues to increase in banks and reached 63%, 56.7%
and 56% in Bank of Cyprus, Coops and Hellenic, respectively, in late 2014.
Arrears management units have been created to deal with the largest
non-performing loans. However, progress towards restructuring non-performing
loans remains relatively slow. In that regard, once effectively implemented,
the amended foreclosure law is expected to give banks better ways to deal with
borrowers in default. In addition, developing a market for non-performing loans
and removing impediments for the banks to obtain financial information on
non-performing borrowers should further contribute to the banks' restructuring
efforts.
Despite the volatile deposit outflows,
bank liquidity buffers have improved continuously since early 2015. In the fourth quarter of 2014, and in particular after the
announcement of the results of the European Central Bank's comprehensive
assessment, deposit outflows started to stabilise. As a result, and combined
with loan repayments, recapitalisation and asset divestiture that brought in
fresh cash, the liquidity buffers increased by about EUR 1.25 billion in
commercial banks and in the coops during 2014.  
Capital controls on domestic
transactions have been abolished and controls on external transactions are now
being gradually phased out. As of 8 December 2014,
the restrictive measures were changed and the government issued a
Communication ([3]),
complementing the Roadmap on the liberalisation of external controls. In the
Communication, the authorities committed that the relaxation of controls will
take place in a gradual and prudent manner and will be assessed at regular
intervals. The restrictive measures on external transactions were relaxed
twice, first on 8 December 2014 and then on 12 January 2015. ([4])  
Despite significant progress, reform of
the insolvency framework, which is a major legislative measure for the economic
adjustment programme, has not yet been finalised.
The aim of this reform is to develop the elements necessary for a comprehensive
reform of both the personal and corporate insolvency regimes. This will be
crucial to create incentives for debtors and creditors to agree on debt
restructuring, thereby helping reduce banks' non-performing loans. The drafting
process for most bills has been concluded and texts have been submitted to the
House of Representatives. However, the legislation on the personal insolvency
process is still at the drafting stage. The difficult issues include the
treatment of guarantors and the conditions for obliging banks to participate in
a debt restructuring proposal (compulsory restructuring).
The Cypriot authorities have continued
to implement the anti-money laundering action plan,
focusing on measures to strengthen effective supervision of financial
institutions, lawyers, accountants and administrative service providers.
The Cypriot labour market has been
affected by the economic crisis, with unemployment and poverty having
increased. For 2014, the employment rate of those
aged 20-64 years old stood at 67.3%, decreasing by 8 pps compared to the
employment rate in 2009. The unemployment rate was 16.1% in 2014 (from 11.9% in
2012 and 15.9% in 2013). The number of people at risk of-poverty or social
exclusion increased in the last years, reaching 27.8% of the total population
in 2013, above the EU average (24.5%) Youth unemployment (people under 25)
reached 35.5% in 2014, an increase of 8 pps compared with 2012. Measures to
boost employment and to mitigate the negative social effects of unemployment
have been introduced and are currently being implemented. These include
reinforcing the public employment services, activation measures for the
unemployed, the National Youth Action Plan, and the Guaranteed Minimum Income.
As the outlook of Cyprus's labour market remains challenging, more margin for
rapid, continuous and effective responses is expected.
The authorities are advancing in the
reform of the system of activation policies, but the capacity of the public
employment services to address its new tasks remains insufficient, both in terms of the number of staff and of organisation and
procedures. A budget of EUR 5.7 million has been allocated to boost the
administrative capacity of public employment services through the 2014-2020
Operational Programme of the European Social Fund, out of which about EUR 2
million are expected to be immediately committed. However, an action plan
reflecting how the increase in staff is matched by other measures could be a
tool ensuring a more effective and efficient service delivery.
A system for the continuous monitoring
and evaluation of active labour market policies is expected to be operational
in 2015. Cyprus is currently implementing a
comprehensive reform of its active labour market policies improving the design,
administration, and monitoring of the different measures. Regarding
implementation of these schemes, a uniform monitoring and evaluation framework
is under preparation, with the aim of applying the framework in 2015 to all
active labour market policies. A common database is being set up so as to improve
coordination and the automatic exchange of information between the different
implementing bodies. The challenge will be to follow up on the results of these
evaluations, in order to significantly improve the impact of the active labour
market policies.
Cyprus is making substantial efforts to
implement the Youth Guarantee, but policy responses are not comprehensive
enough to ensure that all the youth not-in-employment-education-or-training
(NEET) are covered by a Youth Guarantee. In 2013
only 36% of unemployed youth were registered with the public employment
services. A fully-fledged outreach strategy for young people
not-in-employment-education-or-training is lacking and the pace of
implementation of ongoing reforms seems to be too slow to have an impact on the
employability of young people even in the medium term. The biggest challenges
for the delivery of a Youth Guarantee in Cyprus remain the capacity of the
public employment services to provide Youth Guarantee-related services to all
young people not in employment, education or training, the provision of good
quality offers under the Youth Guarantee, and the creation of a partnership
approach for the delivery of the Youth Guarantee.
There has been a tripartite agreement
for the suspension of wage indexation (Cost of Living Adjustment, CoLA) in the
private sector until end-2016, but there is still no consensus on the
application thereafter of the reformed system adopted for the public sector. With regards to the adoption of a reformed system after the end of
the suspension, social partners have so far accepted the application of a lower
(annual) frequency of adjustments and the automatic suspension of indexation
during recessions, but no agreement has been reached on partial indexation at
50% of inflation.
The system in place to fight undeclared
labour suffers from a number of structural shortcomings. A review of the system of labour inspections has been initiated in
order to improve its effectiveness and efficiency. A technical assistance
project provided through the Support Group for Cyprus is currently on-going,
with the aim of identifying the key components necessary to efficiently fight
undeclared work.
The new guaranteed minimum income is
being implemented, albeit at a slow pace, while the implementation of the other
parts of the welfare reform is progressing less rapidly. The Cypriot authorities started implementing the new guaranteed
minimum income as of mid-July 2014, but the processing of applications has been
slow so far. Out of some 70,000 applications received, only about 10,000 had
been processed by December 2014. The authorities indicate the lack of staff,
complex eligibility verification, adjusting to new processes and Information
Technology issues as key causes. In addition, progress on building a national
registry of social transfer beneficiaries is much slower than initially
anticipated. The purpose of the registry is to limit abuse of the system and
collect important information, with a view to a possible streamlining of
benefits by building a database with profiles and eligibility information
covering beneficiaries of all types of social transfers. On the basis of the
registry, the authorities are to provide an assessment report of the welfare
reform, including recommendations for refinements. Work has not yet started on
some elements of the July 2013 welfare reform plan, notably concerning
need-driven benefits outside the scope of the guaranteed minimum income.
According to the plan, some of the benefits would be streamlined and better targeted,
and some would also be consolidated (e.g. child and disability benefits and
housing benefits for the displaced).
Early school leaving has declined
steadily, but this masks a lack of efficiency of public spending and low
quality of educational outcomes. The country also
features the lowest participation rate in vocational education and training in
the EU ([5]), although
recent reforms in this area include a gradually expanding offer of vocational
education and training. While the tertiary attainment rate is one of the
highest in the EU, Cyprus is faced with the lowest employability rate of recent
graduates in the EU and with low levels of young adults' basic skills.
Overall progress regarding healthcare
reform has been very limited. The reform of the National
Health System is expected to be fully implemented by mid-2016. However, very
limited progress has been made on adopting the amended National Health System
bill and automating hospital bills, on finalising tendering of the Information
Technology infrastructure for the National Health System, on defining
pharmaceutical policies under the National Health System, or on adopting
contingency measures under the National Health System. 
Programme conditionality also includes
the implementation of structural reforms to support competitiveness and
sustainable growth. These reforms tackle specific
areas such as the privatisation of state-owned enterprises, the implementation
of reforms in the goods and services markets (including the liberalisation of
regulated professions, the revamping of the tourism strategy, the issuance and
transfer of title deeds, the elimination of court backlogs), and development of
the energy sector. An overhauling approach provided by a national growth
strategy is aimed at complementing these reforms.
Some progress has been made on
privatisation, which should help improve competitiveness and economic
efficiency. The Privatisation Unit in charge of
implementing the agreed privatisation plan and law (adopted in December 2013
and March 2014, respectively), was formally established in June 2014 but is
still striving to get fully staffed. The appointment of independent advisers is
gradually taking place, although with delays. As the main source of
privatisation proceeds, Cyprus's Telecoms Authority's rapid conversion into a
Limited Liability Company remains a number one priority. ([6]) The Energy Authority of Cyprus's unbundling study has also
incurred delays, as the tender for selecting its adviser has been very recent.
The concession agreement of Limassol Port's commercial activities, which is
under the direct umbrella of the Ministry of Communication and Works, also
needs speeding up. The law on state-owned enterprises' corporate governance,
which introduces better coordination, control and supervision of state-owned
enterprises, and a more rigorous approval procedure for the creation of new
state-owned enterprises, is facing delays for its adoption.
Reforms in the goods and services
markets are slowly being implemented. The Cypriot
authorities submitted four draft laws on the access to and exercise of
regulated professions (ergo-therapists, agriculturists, veterinarians,
psychologists) to the House of Representatives in September 2014. In December
2014, the laws on ergo-therapists and psychologists were adopted, whilst the
laws for agriculturists and veterinarians are expected to be adopted by
February. As far as the engineers professions are concerned, Cyprus has so far
failed to address concerns over shareholding requirements applicable to
engineering companies. Discussions revamping the tourism strategy are also
taking a new direction, considering their recent relevance in the growth
strategy. Amendments to the legislation on the mergers and antitrust laws have
been agreed, and while some positive steps have been taken to improve the
staffing of the Cyprus Commission for the Protection of Competition, it remains
to be seen whether this is sufficient to ensure effective competition
enforcement. In relation to the ongoing infringement procedure for incorrect
implementation and enforcement of EU rules on unfair commercial practices and
unfair contract terms concerning property sales in Cyprus, progress on addressing
the problem has been made, but has been limited compared to the attention that
it would deserve. The substantial backlog of property rights (title deeds)
pending for issuance and/or transfer to the final property buyer poses risks
from legal disputes and slows the pace of judicial procedures. Although
progress has been made on the pace of issuance and transfer of the title deeds,
additional streamlining and facilitation of these processes can help addressing
the significant risks entailed with the buyers not being the legal owners. The
Cypriot authorities committed to improving the pace of court handling to
eliminate court backlogs which are particularly high. Since part of the
backlogs is due to immovable property cases, specific judges were assigned in
each District Court, with instructions to give priority to these cases.
For the energy sector, the Cypriot
government is developing a comprehensive strategy for exploiting its
potentially large off-shore gas reservoir and transforming its domestic energy
sector (including expanding renewable energy sources). This includes a roll-out plan for the gas infrastructure; setting
up a Sovereign Wealth Fund well anchored in the Fiscal Responsibility and
Budget System Law, with clear inflow and outflow rules; and an outline of the
market organisation and regulatory regime for the domestic energy sector and
gas exports. A successful strategy will contribute to establishing a stable
public revenue flow and to lower electricity prices.
The Cypriot authorities have made
progress in developing a comprehensive and coherent growth strategy. This builds on the ongoing public administration reform, public
financial management reform, tourism strategy, business environment, and on
other commitments in Cyprus's economic adjustment programme and relevant EU
initiatives. It also takes into account the Partnership Agreement for
implementing the European Structural and Investment Funds, as well as the smart
specialisation strategy, which identifies the comparative advantages of the
country and the sectors with high added-value, in view to boosting
competitiveness and creating sustainable jobs. Whilst the action plan for the
growth strategy exists, implementation and streamlining are yet to take place.
The Cypriot authorities are committed to
undergo a comprehensive public administration reform. The public administration review has been seriously delayed since
last summer 2014 and it is essential to set clear priorities for a meaningful
horizontal public administration reform. The World Bank and experts from the
United Kingdom produced a report identifying the main shortcomings in the
public administration, notably the high wage bill, the lack of a link between
performance and pay, as well as between performance and promotion, the
inefficient personnel selection and management, and the practically inexistent
mobility between and within government entities. On the basis of this report,
the authorities are preparing a reform plan, with detailed features and
deadlines of the envisaged reforms, including the government's main priorities,
while ensuring an appropriate digitalisation of the Public
Administration. ([7])
Progress has been made on the ministries
covered by the first batch of reviews (health,
education and agriculture); however, a delay of more than six months has been
accumulated for the review of local governments, which still lacks a specific
reform plan. Preparatory steps on the second batch of ministries/institutions (remaining
ministries, state-owned enterprises) are ongoing. 
 Europe 2020 (national targets and progress) 
 2011 Commitments || Summary assessment 
 Employment rate: 75% - 77% of the population aged 20–64 should be employed by 2020.   || The employment rate has fallen ever since 2009 and continued to do so in 2013. For 2014, the employment rate of those aged 20-64 years old was 67.3%, 8 pps. below the rate in 2009, and below the EU average of 69.2%. Women continue to face low employment rates (62.2% in 2013 against 63.4% in 2014) compared to men (72.6% in 2013 against 71.6% in 2014), although the overall unemployment rate was slightly higher for men than for women in 2014. Employment rates for men are below the EU average, while for women they remain the same. From 11.9% in 2012 and 15.9% in 2013, the unemployment rate reached 16.1% in 2014 on the back of a shrinking labour force and a milder GDP contraction, with fewer job losses and slightly improved job-finding rates. After peaking at 38.9% in 2013, youth unemployment declined to 35.5% in 2014. Long-term unemployment has also increased considerably in recent years and it has reached 7.7% in 2014 (up from 6.1% in 2013 and 3.6% in 2012). Cyprus has a not-in-education-employment-and-training rate of 18.7% in 2013 for people aged 15-24 years old up from 16% in 2012, (13% for EU in 2013), while for people up to 29 years old, the Not-in-education-employment-and-training rate reached 20.4% up from 17.3% in 2012 (15.9% for EU in 2013). Given the continuing contraction of the economy, reducing unemployment –including the long-term unemployment– remains a major challenge. Reaching the national employment target of 75-77% over the medium-term would remain extremely difficult. 
 Research and development target: Increase research and development expenditure to 0.5% of GDP by 2020. || The Cypriot authorities decided to maintain the modest national Europe 2020 target for research and development at 0.50% of GDP (set in the context of the 2013 national reform programme). Investment in research and development as a percentage of GDP amounted to 0.45% in 2010, 0.46% in 2011, 0.43% in 2012 and 0.48% (provisional) in 2013, as the crisis had already started to kick-in with severe budgetary cuts affecting also the research and development sector. The share of private sector spending is one of the lowest in EU and is decreasing. On the policy side, there is now awareness that the participation of business in research and development activities might also have been hampered by institutional factors, complex and lengthy procedures in the system of incentives, as well as policies that favour academia, rather than the need of enterprises to improve their competitiveness. A National Committee on Research, Innovation and Technological Development was set up in September 2013, with the aim of reviewing the national research and innovation system and giving relevant recommendations. While the work of the committee was completed in March 2014, it is still unclear how governance of research and development system will be overhauled. However, significant funding opportunities from EU's Horizon 2020 Research & Innovation Programme continue to exist, providing support to Research beneficiaries and SMEs from Cyprus. Further monitoring is encouraged on the developments of the smart specialisation strategy in the context of what is currently being defined as Cyprus's national growth strategy. 
 Renewable energy target: 13% of gross final energy consumption from renewable sources. || The main challenges in the energy and climate field for Cyprus are twofold: (1) the high dependence on imported fuels, which strains public finances and poses concerns from the energy security perspective; (2) the higher than EU average greenhouse gas and energy intensity of the economy (0.52Gg tonnes per million EUR GDP compared to 0.35 for the EU). On (1), some progress has been made with initiatives in the field of renewable energies (large photovoltaic parks, 'Solar energy for all' initiative, net metering) and with the exploration of the off-short gas resources. For instance, Cyprus has made progress developing energy from renewable sources: according to the most recent Eurostat data, Cyprus has achieved a share of renewable energy of 7.4% in 2013 respectively and has thus met the first interim target of 4.8%. For the time being, Cyprus can be considered to be on track towards this Europe 2020 target. However, since the trajectory is not linear, the final target will be achieved by means of a stronger annual average growth of the renewable energy share, in line with Cyprus's high potential in this area. On (2), preliminary initiatives for the transposition of the EU acquis in the field of energy efficiency have been undertaken, but progress is limited. Cyprus is benefiting from the Support Group for Cyprus's technical assistance, encompassing both areas. 
 Greenhouse gas emission target: Reduce greenhouse gas emissions to 5.5 Mt CO2 equivalent in 2020. || According to national projections submitted in 2013 and taking existing measures into account, the greenhouse gas emissions in the sectors out of the EU Emission Trading System (non-ETS) are projected to be 2.8 Mt CO2 equivalent in 2020, therefore, the target is expected to be reached (with a margin of 46 percentage points). However, challenges remain in respect to greenhouse gas emissions, such as reliance on oil imports, energy intensity of the transport sector, and non-differentiated energy mix and low energy efficiency. As an island, Cyprus depends heavily on transport to guarantee accessibility of citizens to the EU and trade within the internal market and to overseas. Along with the priorities of developing the ports and airports, as well as their connections to the production and distribution areas of freight and to cities for passengers, logistic information systems and traffic management services have not yet been fully developed. The use of cleaner fuels in transport has not yet been considered either. The efficient use of the available EU funding instruments, such as the European Structural and Investment Funds, the Connecting Europe Facility and the new European Fund for Strategic Investment would help improving all transport-related areas. In particular, priority could be given to Trans-European Transport Networks core network projects on the Orient/East-Med Corridor and on Motorways of the Sea projects. As transport represents more than half of total CO2 emissions from non-ETS activities in Cyprus, reversing the trend in CO2 emissions from transport could enable Cyprus to meet its Europe 2020 target. On environment, Cyprus is second only to Denmark in the list of municipal waste generation and faces significant problems with the treatment of its waste. In order to reach the 2020 recycling target of the Waste Framework Directive (50%) and the goals set in the 7th Environment Action Programme, Cyprus has requested technical assistance in the field of waste management, so as to, among others, further develop separate collection, combined with the required facilities ensuring a high level of recycling/composting. Water management may also be regarded as one of Cyprus's environmental priorities, considering its increasingly challenging scarcity in the island; and more is needed on eco-innovation, e.g. dealing with water and energy shortages, excess of waste and air pollution. According to the 2013 Eco-Innovation Scoreboard, Cyprus is ranked as the 3rd worst performer in the EU. Cyprus is particularly vulnerable to the adverse impacts of climate change([8]) and is likely to suffer multiple stresses due to, in particular, increasing heat waves and droughts exacerbated also by the competition for water. The Cypriot economy could be seriously affected, in particular in such areas as forestry, agriculture, water and biodiversity([9]). Cyprus has started to develop a National Adaptation Strategy which has not yet been adopted, despite the strong encouragements made in the EU's Adaptation Strategy. It is unclear where this process currently stands. 
 Energy efficiency target: absolute level of primary consumption of 2.8 Mtoe || Primary consumption of energy in Cyprus amounted to 2.7 Mtoe in 2010, 2.6 Mtoe in 2011, 2.5 Mtoe in 2012, and 2.2 Mtoe in 2013. This means that gross inland primary consumption has been reduced significantly in the last few years and therefore the absolute objective has been overachieved. Nonetheless, two additional factors may have had a significant impact: first, the economic recession since 2012 indirectly drew the energy consumption downwards; second, over 90% of the inland's energy consumption is covered by imported oil and oil products, which in the last few years have become increasingly expensive, thus constraining consumption. Should these two factors eventually change direction, energy consumption could then again swiftly rise. 
 Early school leaving target: Reduce the rate of early school leavers to 10% by 2020. || Cyprus has witnessed a steady drop in early school leaving rates from 14.9% in 2006 to 9.1% in 2013 (compared to 11.9% in the EU) and has thereby exceeded its national target of 10%. Young men are three times more likely to leave school early (14.8%) than young women (4.2%). Children with a migrant background are at a significantly higher risk of dropping out from education. As regards basic skills in mathematics, reading, and science, the country showed poor performance in the 2012 OECD Programme for International Student Assessment (PISA) in all three areas. Cyprus had the weakest EU results for sciences (38% low achievers), the second worst for mathematics (42% low achievers), and the third worst EU score for reading (32.8% low achievers). Underperformance concerns mainly boys with a migrant background. Finally, Cyprus had a not-in-employment-education-or-training rate of 18.3% in 2013 in the 15-24 age cohort. 
 Tertiary education target: Increase participation in higher education to 46%. || Cyprus has one of the highest tertiary attainment rates in the EU, with 47.8% in 2013 compared to the European average of 36.9%, and has therefore outperformed its national quantitative target of 46%. However, as regards basic skills, the performance of tertiary graduates is not significantly better than that of upper secondary school graduates.([10]) In 2012, Cyprus had the second lowest number of tertiary graduates in science and technology per 1,000 inhabitants aged 20-29 in the EU (9 compared to approximately 17 at EU level).([11]) Finally, the employment rate of recent tertiary education graduates in Cyprus is the lowest in the EU (64.9% vs. EU average 80.7%).([12]) 
 Target for reducing the population at risk of poverty or social exclusion in number of persons: Reduce the number of people at risk of poverty or social inclusion by 27,000 persons or decrease to 19.3% of the population. || Data until 2013 show that the social situation in Cyprus has been deteriorating. Almost all indicators are showing negative trends in 2013. The proportion of people-at-risk-of-poverty-or-social-exclusion sharply rose in recent years, reaching 27.8% of the total population in 2013, well above the EU average (24.5%) and the poverty target set by Cyprus (19.3%). As a consequence, the number of people-at-risk-of-poverty-or-social-inclusion increased to 240,000 people, from 234,000 in 2012 and 207,000 in 2011. The increase of the people-at-risk-of-poverty-or-social-exclusion is reflected in all 3 sub-indicators: the at-risk-of poverty rate (i.e. monetary poverty) increased from 14.7% in 2012 to 15.3% in 2013; the severe material deprivation increased from 15% in 2012 to 16.1% in 2013 (severe material deprivation sharply increased in the period 2009-2013 by 6.6 pps, well above the EU average of 9.6%); and the share of people living in very low work intensity households (quasi-jobless households) increased by 1.4% in 2013 (2013: 7.9%, 2012: 6.5%). Despite the general increase of the people-at-risk-of-poverty-or-social-exclusion, not all age groups are affected in the same way. While the rate for elderly people has decreased considerably (from 33.4% in 2012 to 26.1% in 2013), the rate for youth and working-age people has increased (from 27.5% and 25.8% in 2012 to 27.7% and 28.2% in 2013). The recently introduced guaranteed minimum income, which inter alia established a guaranteed minimum income for the long-term unemployed and the working poor, is expected to reduce the people-at-risk-of-poverty-or-social-exclusion. 
 Table B.1:       Macroeconomic indicators 
 (1) The output gap constitutes the gap between the actual and potential gross domestic product at 2010 market prices. (2) The indicator of domestic demand includes stocks. (3) Unemployed persons are all those who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74. Source: European Commission 2015 winter forecast; Commission calculations 
 Table B.2:       Financial market indicators 
 (1) Latest data November 2014. (2) Latest data Q2 2014. (3) Latest data September 2014. (4) Latest data June 2014.  Monetary authorities, monetary and financial institutions are not included. * Measured in basis points. Source: IMF (financial soundness indicators); European Commission (long-term interest rates); World Bank (gross external debt); ECB (all other indicators). 
 Table B.3:       Taxation indicators 
 (1)Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission (2014), Taxation trends in the European Union, for a more detailed explanation. (2) This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.                                                                                                                                (3) VAT efficiency is measured via the VAT revenue ratio. It is defined as the ratio between the actual VAT revenue collected and the revenue that would be raised if VAT was applied at the standard rate to all final (domestic) consumption expenditures, which is an imperfect measure of the theoretical pure VAT base. A low ratio can indicate a reduction of the tax base due to large exemptions or the application of reduced rates to a wide range of goods and services (‘policy gap’) or a failure to collect all tax due to e.g. fraud (‘collection gap’). It should be noted that the relative scale of cross-border shopping (including trade in financial services) compared to domestic consumption also influences the value of the ratio, notably for smaller economies. For a more detailed discussion, see European Commission (2012), Tax Reforms in EU Member States, and OECD (2014), Consumption tax trends.                                                                                                                                 Source: European Commission 
 Table B.4:       Labour market and social indicators 
 (1) Unemployed persons are all those who were not employed, but had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. Data on the unemployment rate of 2014 includes the last release by Eurostat in early February 2015.                                                   (2) Long-term unemployed are persons who have been unemployed for at least 12 months.                                                          Source: European Commission (EU Labour Force Survey and European National Accounts) 
 Table B.5:       Expenditure on social protection benefits 
 (1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).                               (2) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national equivalised median income.                                                                                                                                (3) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour TV, or ix) have a telephone.                                                                                                                                          (4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. (5) For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices (HICP) = 100 in 2006 (2007 survey refers to 2006 incomes)                                                                                                                                       (6) 2014 data refer to the average of the first three quarters.                                                                                                                                 Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 
 Table B.6:       Product market performance and policy indicators 
 (1) Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed. (2) Patent data refer to applications to the European Patent Office (EPO). They are counted according to the year in which they were filed at the EPO. They are broken down according to the inventor’s place of residence, using fractional counting if multiple inventors or IPC classes are provided to avoid double counting.                                                                                                                         (3) The methodologies, including the assumptions, for this indicator are presented in detail here: http://www.doingbusiness.org/methodology.                                                                                                                                                                   (4) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are presented in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm (5) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR).                                                    Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for the product market regulation indicators) 
 Table B.7:       Green growth 
 (1) Country-specific notes:                                                                                                                                                                                     2013 is not included in the table due to lack of data.                                                                                                                                                 General explanation of the table items:                                                                                                                                                                                All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)                                                   Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)                                                                     Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)                                                  Resource intensity: Domestic material consumption (in kg) divided by GDP (in EUR)                                                                         Waste intensity: waste (in kg) divided by GDP (in EUR)                                                                                                                                 Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP                                                      Energy weight in HICP: the proportion of "energy" items in the consumption basket used for the construction of the HICP Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % change)                                                                                                                                                                             Environmental taxes over labour or total taxes: from DG TAXUD’s database ‘Taxation trends in the European Union’      Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR)                                                                                                                                                                                      Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP Electricity and gas prices for medium-sized industrial users: consumption band 500–2000MWh and 10000–100000 GJ; figures excl. VAT.                                                                                                                                                                           Recycling rate of municipal waste: ratio of recycled municipal waste to total municipal waste                                                    Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP Proportion of GHG emissions covered by ETS: based on greenhouse gas emissions (excl LULUCF) as reported by Member States to the European Environment Agency.                                                                                                                                          Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value added (in 2005 EUR)                                                                                                                                                                           Transport carbon intensity: greenhouse gas emissions in transport activity divided by gross value added of the transport sector                                                                                                                                                                                  Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of international bunker fuels                                                                                                                                                                                      Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin                                                                                                                                                                              Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels                                                                                                                                                                                        Renewable energy share of energy mix: %-share of gross inland energy consumption, expressed in tonne oil equivalents * European Commission and European Environment Agency                                                                                                                                ** For 2007 average of S1 & S2 for DE, HR, LU, NL, FI, SE & UK. Other countries only have S2.                                                               *** For 2007 average of S1 & S2 for HR, IT, NL, FI, SE & UK. Other countries only have S2.                                                                                               Source: European Commission unless indicated otherwise; European Commission calculations 
([1])  The recent revisions of the balance of
payments, in accordance with the Balance of Payments Manual 6 (BPM6) have led
to a 1.3pps. downward revision of the current account balance.
([2])
These reports, along with other information related to the financial assistance
programme, can be found on: http://ec.europa.eu/economy_finance/assistance_eu_ms/cyprus/index_en.htm
([3])  http://www.mof.gov.cy/mof/mof.nsf/All/2ABF791EC1C658B1C2257DA5004AE3F9/$file/Policy%20for%20gradual%20relaxation%20of%20remaining%20restrictive%20measures%20CLEAR%204%20Dec%202014.pdf
([4])  On 8 December 2014, the limits for
external transfers were doubled as follows: (1) the ceiling for payments
exempted from the approval of the Payment Committee would be raised to EUR 2,000,000;
(2) the ceiling for transfers of deposits/funds outside the Republic per person
for each credit institution and or payment institution regardless of the
purpose would be raised to EUR 10,000 per month; (3) the ceiling for the export
of euro notes and/or foreign currency notes per natural person per journey
abroad would be raised to EUR 6,000.
       On 12 January 2015, the
restrictive measures were relaxed in the following way: (1) the ceiling for
payments exempted from the approval of the Payment Committee was abolished, but
the Committee might request information on payments or transfers from the
banks; (2) the ceiling for transfers of deposits/funds outside the Republic per
person for each credit institution and/or payment institution regardless of the
purpose were raised to EUR 20,000 per month; (3) the ceiling for the export of
euro notes and/or foreign currency notes per natural person per journey abroad
was raised to EUR 10,000.
([5])  12.7% in 2012 (EU average being 50.3%).
([6])  Cyprus is at the vanguard of the EU
when it comes to the availability of fixed broadband networks, including
high-speed, but is lagging behind in the deployment of high-speed mobile
networks.
([7])  Currently, Cyprus only ranks 21st out
of 28 Member States in eGovernment users (27.7% comparing to an EU average of
32.8%).
([8])  EU Strategy on adaptation to climate
change  COM(2013) 216 final: 
http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52013DC0216&from=EN

([9])  Sixth National Communication under the
United Nations Framework Convention on Climate Change.
([10]) OECD International Report on the Survey of Adult Skills (2012) http://www.oecd.org/site/piaac/.
([11]) Eurostat, Science and technology graduates
by sex (tps00188)
([12]) See additional contextual indicators at: http://ec.europa.eu/education/monitor